Why emerging markets still offer good stock bargains

CHICAGO (Reuters) - There’s been a lot to grumble about when it comes to Europe and emerging markets this year.

Most of Western and Southern Europe is still trying to dig out of a recession. Economic growth has eased in developing countries. And when the Federal Reserve hinted that it might back off its bond-buying program recently, equities in most emerging markets went into a funk.

But attractive valuations and some palpable signs of rebounds are boosting the fortunes of shares of non-U.S. companies, particularly in the emerging markets. If you don’t have any stake in them, it’s a good time to buy.

At first blush, the returns this year from the emerging markets don’t exactly flash a buy signal. The iShares MSCI Emerging Markets exchange-traded fund, for example, is down 10 percent year-to-date through July 19; 4 percent of that loss occurred in the past three months. The fund invests in an index that represents major developing regions in Africa, Asia, Latin America and the Middle East.

Although equities in emerging markets are typically more volatile than the U.S. or Canada, they were hyper-sensitive to the Fed’s wind-down announcement, which has since been softened by Chairman Ben Bernanke. The central bank may not put the brakes on its $85-billion-per-month bond buying program this year after all.

The beating that developing-country stocks took only made them better values. Since most economic forecasts have emerging markets growing this year, they offer some attractive valuations.

Alec Young, global equity strategist for S&P Capital IQ, told me the 12-month forward price-earnings ratio for emerging markets is 10, compared to around 14.5 for the S&P 500. That means investors see developing markets trading at a discount to the biggest U.S. stocks.

“For people who don’t have international exposure, now is a good time to get involved,” Young says.

Besides the iShares fund, other good vehicles include the Vanguard FTSE Emerging Markets ETF, which holds major Asian stocks such as China Mobile Ltd., Taiwan Semiconductor Manufacturing Company and Samsung Electronics Co Ltd. GDR. The fund is up almost 3 percent over the past year through July 19 and charges 0.18 percent in annual expenses.

For those who want to focus more on the recovering Europe theme, the iShares MSCI EAFE fund holds brand-name European stocks such as Nestle SA and HSBC Holdings Plc. The fund has gained almost 24 percent over the past year. It costs 0.34 percent annually in management expenses.

GROWTH FORECAST BRIGHTENING

Despite the trickle of good news overseas, international investors have been concerned with slackening growth in China. Figures released by China’s National Bureau of Statistics on July 8 showed that the Chinese economy grew at a 7.5 percent rate year-over-year in the second quarter, off from its nearly 8 percent pace in the final quarter of 2012. China may grow at a 7.6 percent rate next year, if economists are correct in their forecasts.

The Chinese slowdown has led some economists to suspect that more of the same is ahead. That’s going to impact every market from Australia to Canada, countries that supply natural resources to the People’s Republic.

Still, analysts like Young see attractive valuations for non-U.S. companies compared to U.S. prices. In Europe and Japan, “we see record stimulus being maintained to jump-start weak growth,” Young adds, highlighting the long view that the policies in Japan and Europe will make their economies stronger and more robust trading partners for emerging markets.

In other words, with most central banks keeping their hands on the stimulus throttle, stock prices could continue to rise in most developed and emerging countries.

Looking ahead, population surges in emerging markets will boost companies that produce everything from industrial metals to consumer goods. And there are going to be some surprises. According to a recent United Nations report, Nigeria will overtake the U.S. as the world’s third-most populous nation in 2050 and India will claim the top spot from China around 2028.

More importantly, non-U.S. markets represent 51 percent of global stock capitalization, so even with this year’s volatility, you still need to have from 10 percent to one-third of your portfolio in them.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

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